Doing business in Canada can provide numerous growth opportunities for U.S. businesses. However, making the right decisions in this area requires understanding not just one tax code, but two, and then understanding how those two codes interact. This can be a daunting process and many CPAs and business clients don’t know where to begin. Fortunately, somebody does! We recently caught up with Canadian tax CPAs Harry Chana and Brian Morcombe about key income and sales tax questions to ask any client doing (or considering doing) business in the Great White North.
Income Tax: According to Harry Chana, CPA, CA – Partner of BDO Canada LLP through a Corporation / International Tax Services, BDO Canada LLP, the first three income tax-related questions he would ask a client to consider would be these:
- Do you plan to send any employees to Canada? Even sending a single employee to Canada for one day to attend a trade show could pull you into the Canadian taxation net as you would be considered to be carrying on business in Canada.
- Do you have any Canadian customers? If so, how did you acquire them? Understanding the sales cycle is important to understand whether you or your company could be caught by Canadian tax.
- Do plan on acquiring a Canadian business? If so, there are certain tax strategies that you need to implement / consider before you acquire the Canadian company to ensure it is done tax efficiently.
Sales Tax: According to Brian Morcombe, CPA, CMA / Senior Manager / Commodity Tax / BDO Canada LLP, the first three sales tax-related questions he would ask a client to consider would be these:
- Are you making supplies of property (including intellectual, real and tangible) and/or services in Canada? If so, there is likely a Canadian Goods & Services Tax (GST)/Harmonized Sales Tax (HST), Quebec Sales Tax (QST) and/or British Columbia, Saskatchewan and Manitoba Provincial Sales Taxes (PST) implication.
- To the extent you are making supplies in Canada, are you paying GST/HST/QST on your purchases? If so, registering for these taxes may provide the opportunity to recover the taxes paid. That said, mechanisms exist that may allow for the recovery of taxes even where the purchaser is not a registrant. Note that, with few exceptions, if you import property into Canada as Importer of Record, you will be required to pay 5% Division III GST on the value for duty of the goods being imported. This tax is generally recoverable to persons engaged in commercial activities in Canada.
- In addition to supplying property/services in Canada as a non-resident, are you sending employees to Canada, soliciting orders there and maintaining a bank account there? These are simply a few of the factors used to determine if a non-resident is carrying on business in Canada for GST/HST purposes. Although there is no magic number, as few as four of these factors (such as the ones noted) could result in a non-resident being viewed by CRA as carrying on business in Canada resulting in a requirement to register for GST/HST purposes.
This article barely scratches the surface of issues businesses need to consider about their interactions with our neighbor to the north. For a deeper dive join Chana and Morcombe for Doing Business in Canada – A Comprehensive Review. This four-hour webinar provides participants with an overview of the Canadian tax system and addresses:
- Withholding obligations for non-residents providing services in Canada
- Canadian Voluntary Disclosure Program
- Inbound Structuring Alternatives
- Thin Capitalization-the Canadian approach
- Inter-corporate loans and the Canadian income tax consequences
- Recent federal budget international measures
- Goods and Services Tax (GST)/ Harmonized Sales Tax (HST) overview
- GST/HST registration requirements and review of return completion
- Non-Residents and carrying on business for GST/HST purposes, including a review of typical scenarios
- Common GST/HST errors, exposure issues, and resolutions
- And much more